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Carbon Tax vs. Emissions Trading
electricitylikesme
Registered User regular
Registered User regular
In many countries around the world, the current 'solution' to climate change is being touted as either an emissions trading scheme (hereafter I will refer to as ETS) or a carbon tax (tax on carbon dioxide).
Here in Australia the Rudd government recently (probably fortunately) failed to pass a pretty poor implementation of an emissions trading scheme, and we are almost certainly on track to utterly miss our pathetic target of a 5% emissions reduction by 2020 (of note that we need to do something like a 50% reduction by 2050 to actually approach what we need to do, and we are the worst per-capita emitter of carbon dioxide in the world).
Why am I happy about this? I'm really not - just Rudd is kind of an inept politician it seems - he likes big plans over phased implementations or sanity, but the opposition is not much better. But in a sense, I do not like emissions trading schemes - they're a conservative delusion that if you make everything a "market" then clearly all problems can be solved. They're also widely open to manipulation, require enormous oversight and careful management in order to actually function - as well as behaving in unexpected ways.
A better solution, and the one which is now preferred by many commentators is the carbon tax. Ideas on implementation vary, but the basic notion is that emission of carbon dioxide by any industry would incur some charge per ton of CO2 emitted. Some prefer flat-tax, others prefer a progressive tax. This is the option I prefer, because it has political expediency.
When the ETS debate in Australia was going on, the essential cry of the opposition became that it would levy "a great big tax" on Australian families. This is probably accurate - also an indightment of its stupidity - since its supposed to work the other way - we the consumers get the money and it offsets rising costs. Behold the power of the coal lobby.
With a carbon tax, this can, in part, be avoided: pass the tax, and slash corporations tax by the expected immediate yield of the carbon tax, thus making it effectively revenue neutral and not raising taxes on businesses overall. But! You would create a strong incentive for companies to reduce their footprint, since they would effectively pay less tax, and you would create a strong incentive for high-tech industry - since we would now have very low corporate tax rates (Australia's are currently 20% I believe).
Most importantly - it becomes far more difficult for anyone to oppose when you can talk about how taxes don't rise.
tl;dr I think revenue-neutral carbon tax, achieved by slashing corporations tax, is the politically-expendient option to doing something about climate change that actually leads to action. What do you think?
Here in Australia the Rudd government recently (probably fortunately) failed to pass a pretty poor implementation of an emissions trading scheme, and we are almost certainly on track to utterly miss our pathetic target of a 5% emissions reduction by 2020 (of note that we need to do something like a 50% reduction by 2050 to actually approach what we need to do, and we are the worst per-capita emitter of carbon dioxide in the world).
Why am I happy about this? I'm really not - just Rudd is kind of an inept politician it seems - he likes big plans over phased implementations or sanity, but the opposition is not much better. But in a sense, I do not like emissions trading schemes - they're a conservative delusion that if you make everything a "market" then clearly all problems can be solved. They're also widely open to manipulation, require enormous oversight and careful management in order to actually function - as well as behaving in unexpected ways.
A better solution, and the one which is now preferred by many commentators is the carbon tax. Ideas on implementation vary, but the basic notion is that emission of carbon dioxide by any industry would incur some charge per ton of CO2 emitted. Some prefer flat-tax, others prefer a progressive tax. This is the option I prefer, because it has political expediency.
When the ETS debate in Australia was going on, the essential cry of the opposition became that it would levy "a great big tax" on Australian families. This is probably accurate - also an indightment of its stupidity - since its supposed to work the other way - we the consumers get the money and it offsets rising costs. Behold the power of the coal lobby.
With a carbon tax, this can, in part, be avoided: pass the tax, and slash corporations tax by the expected immediate yield of the carbon tax, thus making it effectively revenue neutral and not raising taxes on businesses overall. But! You would create a strong incentive for companies to reduce their footprint, since they would effectively pay less tax, and you would create a strong incentive for high-tech industry - since we would now have very low corporate tax rates (Australia's are currently 20% I believe).
Most importantly - it becomes far more difficult for anyone to oppose when you can talk about how taxes don't rise.
tl;dr I think revenue-neutral carbon tax, achieved by slashing corporations tax, is the politically-expendient option to doing something about climate change that actually leads to action. What do you think?
electricitylikesme on
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If you're going to plow the revenues back into the system to reduce hardship I'm much more in favor of rolling the revenue back into a flat tax credit to people. The poor come out ahead, the average middle class family breaks even, and the market forces are in alignment to drive emission reduction with minimal oversight. Businesses have every reason to want to reduce their energy usage because they feel the costs directly and consumers are encouraged to reduce their emission profile because they feel the costs constantly but are only given yearly offsets (and any level they get to below the national average is just money in their pockets).
The trading scheme also allows an emissions cap to be easily set, though this is usually undermined by creating a maximum permit price, when prices meet this threshold more permits are released.
The US uses a trading scheme for SO2 emissions and it works very well. Better than it was expected to work.
Edit: What to do with the revenues is a separate question from the taxation question. Selling permits or taxing emissions can result in the same thing, and what to do with the revenue is a separate issue.
Has there ever been any idea in the existence of modern society that touched business in any non-liassez-faire way that wasn't immediately meet with pronouncements of doom for domestic industry?
It doesn't have to be a cripplingly high tax, just enough to be felt and provide an incentive for those industries than can be run more cleanly to actually put some effort into doing so.
It doesn't matter. If your industry is inherently pollutive, then there should be less of it. If it then goes out of business and four thousand people are now unemployed and forced to change careers, so be it; it just means that its existence was dependent on pollution to be begin with.
The effect is identical either way, presuming a careful design choice in how to allocate emissions permits prior to trade. Appropriately distributed, the buyers of permits pay people who operate cleaner-than-average industries, which generates the incentive.
Graph to illustrate the equivalency.
With the CO2, it doesn't matter who's emitting it. So you raise the tax (or fix the number of permits) until the actual emissions equal desired emissions. The reason Pigovian taxes and cap-and-trade are market-based approaches is that you don't make the decision whether (or how much) the farm, mill, or factory cut emissions. In the end, with a uniform tax, those for whom it is cheapest to cut, will cut. That's the genius of the market based approaches.
Although there are potential risks with permit hoarding, there are ways around that, such as regulation and tinkering with the actual permit contracts.
What, theoretically, should happen is that marginal abatement costs are equalised over all the firms involved in the scheme; i.e., the Equimarginal principle is satisfied. Those that can afford to abate more pollution (i.e., those with cleaner technology) do, and those that can't, don't. While it may be naive to suggest that this will occur perfectly in practice, there's no reason - if administered competently - that it can't work to a broad extent.
Conversely, taxation is more of a measurement/enforcement problem. It's simpler, and can be altered later - getting it setup in the first place is like, 90% of the battle.
I couldn't have said it better myself. If firms are profit maximizers, the permits will always go to those willing to pay the most. Carbon markets are much too deep to be effectively monopolized.
and market solutions are not "conservative delusions", thank you very much
Explain how.
well he had a graph and everything
but like he said the point of emissions trading is that it sets an upper limit for the amount of pollution, which emissions tax doesn't, and that it in essence allows for those industries that have the most benefit from emitting CO2 to emit and those that can easily cut emissions to cut emissions
resulting theoretically in maximum socioeconomical gain
I get the basics of how markets work. But evidence suggests that with ETS's it's never going to work. It's too complicated to implement well, and faces steep political opposition even then. I'm interested in actually doing something good - and that means beating the tough sell to the electorate, opposition parties which simply don't believe in climate change etc.
Anything which can tweaked, tinkered with or managed has administrative costs - you need those to be low to simply pass the legislation otherwise you get the classic "they're raising taxes!!!" argument.
Not raising taxes is the most important thing you can do, first and foremost, with environmental policy which a lot of people would prefer not to see happen at all.
EDIT: Theoretically lots of things work. My over-arching point is that emissions trading has not proved politically expedient to do, nor comprehensible to the public.
I would also argue that TPP have had a bad empirical rap because of incompetent administration, than because of an underlying economic weakness - numerous simulations have shown TPP schemes to be a desirable method of emissions regulation.
Administration costs. You have to employ people to do it, to run the market etc etc. All of that costs. Then you have to do the other stuff anyway - you have to enforce the permits, and ensure people comply. You need to somehow deal with people who overrun.
Sure, you have to administer a tax - but by comparison your administration is reduced to just the measurement and actual charging. Their are no awkward questions of how to deal with overruns, or how the exchanges should run. More importantly, the costs to companies are predictable in advance which means your surrounding remuneration and tax changes are simpler.
It seems like a lot of proponents of carbon tax/emissions trading don't live in the real world on this- until they figure out how to deal with the lost jobs issue, this type of legislation is dead in the US and a lot of other countries.
Rigorous Scholarship
What does the tax money collected get used for? Seems like if they want industry to reduce actual emissions it would make more sense to regulate their emissions. Instead, companies that have megabucks will just find loopholes to cut the taxes they pay and continue high emission practices.
What's more important, governments having more money in the name of (pseudo-)environmentalism, or actually doing something that results in protecting the environment.
Once again, the rich get to continue business as usual with a slight speedbump, while the rest get to feel the squeeze.
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Seeing as that's the outcome of the 2009 Cap-and-Trade bill in the US, I'd say it's pretty much a dead cert :P
My statement about TPP being less bureaucratically intensive was based on the assumption that the optimal level of taxation is administered in the long run. Whilst there's a bulk of infrastructure to set up for a TPP scheme at the start, with carbon tax you have to continually change it in order to hit that 'just-right' spot where you're not overcharging and you're not just givin' it away. TPPs are also much more flexible in the long-run.
I'm not against the use of a Carbon-Tax either; I realise we live in a second-best World, and therefore realise that - as inelegant and heavy handed as they are - taxes are probably the best mechanism we've got. It's sad that TPP schemes never really manage to get off the ground though, because they offer so much dynamic flexibility over and above outright taxation and other command and control measures.
EDIT:
There's something called the 'Double Dividends' hypothesis - which applies for both taxation and TPP schemes - that is basically that the revenue accrued from taxation/selling off permits can be used to reduce market-distorting taxes in other areas of the economy. Essentially, it suggests that any loss of jobs in a polluting industry can be offset by a gain in jobs in another area of the economy.
Tax money you cycle back to the citizenry as rebates, ideally geared to protect the lower classes more then upper classes (you having hot water and electric lights is somewhat more important then running the 3rd 72" LCD TV in my house).
Business still cuts CO2 emissions, because doing so increases their profits total by reducing their tax burden.
In my opinion, if we could just pass a CO2 tax and have absolutely nothing change in the short term it would still be a huge success because we'd have a system on the books to let us start dealing with CO2 emissions across the board.
This runs into the reality that your political opponents become anyone who represents anywhere with a lot of jobs tied up in those industry's which will lose jobs, whereas no one represents those areas which might gain them and their are social problems transitioning those people. You have to lose jobs eventually, but you can do it gradually.
if our end goal is a set limit on carbon output, it is much easier to accomplish that via a cap&trade approach. the share price will adjust to reflect actual value and emissions should stabilize at desired levels provided the penalty for excess emissions is greater than the market cost of the excess emissions. If we decide we need levels to go down, Gov't buys shares. If we decide we have more room, they sell some.
with a carbon tax approach, we take a wild guess at what the tax should be, then make multiple adjustments to fix output levels as desired. THIS IS NOT SO EASY AS SOME OF US MAKE IT SOUND.
There is much hostility towards taxes and any attempt to raise them (lets be honest with ourselves, we will set the tax too low). Multiple legislative efforts on a global scale to adjust a tax that will be rather unpopular with say 50% of the world is a pipe dream. We will be damned lucky to get people in agreement ONCE. Let alone the multiple attempts it would take to get things right.
Cap and Trade worked just fine for SO2 and will work again here. Shit, it worked so well people don't even remember it.
Barriers to entry are going to exist in either scenario, and a simple auction is a decent way to 'fairly' distribute shares while simultaneously setting prices.
Also, republicans can just repeal a tax. They will have a much harder time seizing assets from publicly traded companies.
just my two cents.
This is true, which is why emissions trading schemes generally require the permits to be 'spent' and returned to the government, whereupon they are auctioned again. It's still cap and trade.
This doesn't help. People working in the industries likely to lose will not easily shift to industries likely to gain; most workers today have some kind of specialization. The supply of skilled people takes a time to adjust; in the meanwhile you're just generating unemployment in losing industries and supernormal pay in winning industries.
Mind you, this is somewhat necessary for adjustment to start taking place. But you can't get away from the reality of people getting unemployed, or having their wages reduced, or being unable to afford their commutes to work, etc. - if we're serious about shifting behavior here, someone at the margin is going to hurt. No free lunch etc.
There are going to be specific people who lose their jobs, and they are going to scream bloody murder to their elected representatives to prevent the passage of any bill or treaty. On the other hand, people who might get a job from such legislation sometime in the future aren't likely to be an organized lobbying group.
Rigorous Scholarship
Oh aye, I was talking about the aggregate effect; I do realise that there will be some level of local unemployment, at least in the short-run - hell, the North of England is still basically destitute after the collapse of heavy industry over 2 decades ago; it's political suicide, but at some point someone needs to make these decisions for the collective long-term benefit.
Couldn't revenues be used to fund re-training and placement for those shafted by the taxes? Although unpopular in the short-run, wouldn't that at least be a viable long-term political goal? Then again, I'm not a politician...
Do you realize that the US has been using emissions trading successfully for many years? It's how SO2 (acid rain) emissions are capped. There's no need to argue hypotheticals. It has actually been implemented with great success.
someone should have mentioned this earlier.
Just wanted to pipe in and say that this is not a reason to NOT do it though(not sure of your position on the matter Ronya). Some people are going to be hurt by every policy or lack of policy. The judge between them is not a matter of who gets hurt, but a matter of how much and how many.
Cap and trade may hurt some people on the fringes, yes. But it helps everyone else, and in greater amounts. If we were going the other way this would look even more obvious as to why its a good idea. I.E. The opposite of this policy would make everyone worse off in order to make a few people on the fringes better off*. When we do that, we typically call it corruption and bad policy. So why is it not in this situation?
*By strict normal theory(I.E. not getting into behavioral aspects which probably don't apply here anyway) the two are the same. A policy that hurts 10 and helps 1 is the same as lack of a policy that helps 10 and hurts 1. So long as the amounts are the same.
So why should we implement a policy that hurts the entire population of the United States in order to give a few people a benefit? If you can't argue for that policy then you cannot argue against cap and trade.
explain how CO2 emissions hurt the entire population of the US. Really there are few countries better equipped to deal with the effects of climate change than the US is. So the legislation your proposing is to help people "over there" while hurting people "here" aka in Rep. Bobs voting district.
And just to bring it up: We are in a recession and employment in industry is already getting pounded.
I mentioned this in the 4th post of the thread!
show me the T-shirt :rotate:
Just because we are better equipped to deal with it does not mean we're well equipped to deal with it.
Anyway, i think there was some report about this that was in the news a few years back. I don't recall what it was called though.
I was just about to come in here to post this, so hurrah!
Also, obligatory Western Climate Initiative shoutout.
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